I am a research fellow at the Hoover Institution, at Stanford, and the Cullen Professor of Economics at the University of Houston. I am also a research professor at the German Institute for Economic Research Berlin. My specialties are Russia and Comparative Economics, and I am adding China to my portfolio. I have written more than 20 books on economics, Russia and comparative economics. I blog at paulgregorysblog.blogspot.com.

Warren Buffett’s secretary, Debbie Bosanek, served as a stage prop for President Obama’s State of the Union speech. She was the president’s chief display of the alleged unfairness of our tax system – a little person paying a higher tax rate than her billionaire boss.

Bosanek’s prominent role in Obama’s “fairness” campaign piqued my curiosity, and I imagine the curiosity of others. How much does her boss pay this downtrodden woman? So far, no one has volunteered this information.

We can get an approximate answer by consulting IRS data on tax rates by adjusted gross income, which would approximate her salary, assuming she does not have significant dividend, interest or capital-gains income (like her boss). I assume Buffett keeps her too busy for her to hold a second job. I also do not know if she is married and filing jointly. If so, it is deceptive for Obama to use her as an example. The higher rate may be due to her husband’s income. So I assume the tax rate referred to is from her own earnings.

Insofar as Buffett (like Mitt Romney) earns income primarily from capital gains, which are taxed at 15 percent (and according to Obama need to be raised for reasons of fairness), we need to determine how much income a taxpayer like Bosanek must earn in order to pay her tax rate. This is easy to do within ranges.

Buffet himself declares that he pays a 17.4 percent rate on taxable income. His staff, like Bosanek, pay an average of 34 percent. The IRS publishes detailed tax tables by income level. The 2009 results show that the average taxpayer paying Buffet’s 17.4 rate earns an adjusted gross income between $100,000 and $200,000. But an average taxpayer in Bosaneck’s rate (after downward adjustment for payroll taxes) earns an adjusted gross income of $200,000 to $500,000. Therefore Buffett must pay Debbie Bosanke a salary well above two hundred thousand.

We must wait for further details to learn how much more than $200,000 she earns. The tax tables tell us about average ranges. For all we know she earns closer to a half million each year, but that is pure speculation.

I have nothing against Debbie Bosanke earning a half million or even more. Buffett is a major player in the world economy. His secretary deserves good compensation. At her income, however, she is scarcely the symbol of injustice that Obama wishes her to project.

I imagine that there are any number of secretaries who would want her job and her place in the Congress gallery for the President’s State of the Union address.

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There’s are several good reasons to tax capital gains at a lower rate than income.

One, of course, is that much of what passes for capital gains is actually fake gains from inflation. If I bought a capital asset for $100 25 years ago and sold it today for $200, I would have “capital gains” of $100, but after inflation, my real profit would be $2. After 15% capital gains tax, I’ve lost money on the investment.

But the second reason is that, in order to obtain that $100 with which to purchase my capital asset, at some point I had to receive enough income to save it up, after paying taxes on the income. If my average overall tax rate is 20%, I’d have to earn $125 in order to acquire the $100 to invest.

This is extremely useful information that allows us to get closer to the secretary’s salary. In fact, it suggests a neater way to do it. If Buffet has a 17.4 percent tax rate (We can forget payroll taxes for him), The IRS’s Table 1.4 (All Returns: Sources of Income, Adjustments, and Tax Items, by Size of Adjusted Gross Income, Tax Year 2009) tells us that taxpayers paying this rate on taxable income earn between 100 and 200K in adjusted gross income. But Buffet claims that his staff pay much higher rates (in the 30 percent plus ranges). If we deduct maximum payroll taxes), each of them would be well above 200K.

It is very difficult and confusing to use IRS data to make these calculation because they relate to averages. But I think we can be confident that his secretaries are earning pretty healthy sums.

The only way to resolve this is to have the secretary tells us what Buffet pays her. If it is a small sum (say under 100k, then I am clearly wrong.

You seem to have looked at the numbers too and you get salaries in the 400K range — higher than my own.

But I think the point is that we SHOULD call out that Mr. Buffett’s figures are misleading. Yes, economists agree that wage-earners “pay” the employer share of payroll taxes, so it may be reasonable to include those. But economists also agree that company owners “pay” corporate income taxes, but Mr. Buffet clearly doesn’t add his companies’ 35% corporate rate to his own.

But I’m surprised that no one is talking about the deceptiveness of including payroll taxes as an argument about regressivity in the tax code. In fact, they are probably the MOST progressive taxes – it’s just that all the progressivity is in the payout. Here’s what the SSA says:

For an individual who first becomes eligible for old-age insurance benefits or disability insurance benefits in 2012, or who dies in 2012 before becoming eligible for benefits, his/her PIA will be the sum of:

(a) 90 percent of the first $767 of his/her average indexed monthly earnings, plus (b) 32 percent of his/her average indexed monthly earnings over $767 and through $4,624, plus (c) 15 percent of his/her average indexed monthly earnings over $4,624.

So a low wage earner paying the 10.4% payroll tax has a marginal replacement rate of 90% of income, while the higher wage worker paying the same 10.4% has a marginal replacement rate of 15%. Um, I think a 6x difference in marginal payout rates is pretty progressive.

There’s a serious discussion out there about taxation, but Mr. Buffett’s folksy story is too clever by half, and he shouldn’t be given a pass on it. He didn’t get to where he is by being sloppy in his numbers, so I can only conclude he’s not interested in being forthright with them.

1. To me, the irony here is that the discussion surrounding Buffett’s secretary omits a very important component: to wit, how entitlement programs like SS and Medicare are funded (or not funded) via payroll taxes. Understandably, demagoguery aimed at millionaires and billionaires is much easier than fleshing out entitlement reform. But it is a shame the GOP has failed to turn this poorly supported populist appeal back to SS and Medicare.

2. You mention that Buffett doesn’t claim EVERYONE in his office pays a higher rate–however, his interview with ABC yesterday suggests Ms. Bosanek is the “average” employee in his office as well as the proposition that everyone pays a higher rate than their boss.

I believe it is much simpler than that. There is another difference between the investment income and the salary – AFAIK, Social Security and Medicare contributions (which are in essence other federal taxes) are subtracted from the salary, not the investment income. If you subtract these taxes from 34%, it effectively lowers the tax bracket into less than 100K range

It may be true that his staff pays a higher tax on incomes when payroll taxes are included.

But if this all-inclusive approach to including all tax payment is to be taken seriously, then for example the total income in the divisor in this equation should also include capital gains from investments in 401k, Roth, life insurance and other tax-advantaged investment instruments the employee holds. Most of this income (and it is income that is not taxed for the very purpose of lowering tax rates) could not even be seen or determined from Bosanek’s tax returns, even if we could see them — it’s not included at all in Adjusted Gross Income. But it is income, and it is not at all taxed. Most very wealthy individuals in Buffett’s category have a proportionally small percentage of their assets placed in such investment instruments (because of contribution limits), though in cases of extremely extraordinary tax planning and investment performance, I suppose it’s conceivably possible to accomplish this (not even sure Warren Buffett could do it).

And c’mon please. The entire purpose of payroll taxes, is that this is income that should flow back to the individual taxpayer in retirement. Financially, it acts a bit like a 401k or retirement program rather than a strict tax, though as we all know there is a wealth redistribution component and generational redistribution component that figures into even that.

Also, I have heard of secretaries who started off with microsoft back in the 80′s, who ended up being multimillionaires from stocks.

I have seen at least web site that said that Buffett sometimes gifts Berkshire Hathaway shares to some of his employees. Even if her salary is on $60k per year, it’s very possible she is a very wealthy individual.

And just because Buffett is a buy-and-hold investor, doesn’t mean his employees would necessarily be. Or, some of them could be sitting on very large unrealized long term capital gains, with a large realized investment income they have in a given year being predominantly short term capital gains or other sources (real estate income).

Ms. Novak, The average worker in America doesn’t even get paid $60,000/yr, that’s the going rate for a secretary. Am I to assume that you pay your office workers more or since Buffet earns more he should pay more?